Student Loans: Repayment becomes write off
20 May 2014
New research suggests that it may not make financial sense to pay off student loans early.
The higher education funding system in England for students changed dramatically in 2012/13, with the most notable reform a near tripling of the maximum tuition fee (and corresponding fee loan) from £3,375 to £9,000. The terms for loan repayment were also changed:
- The rate of interest rose from RPI to between RPI and RPI+3%, depending upon student income.
- The threshold income at which repayments start rose from £15,795 (2012 and RPI-linked) to £21,000 (2016 and earnings-linked thereafter). The rate of repayment is unchanged at 9% of the excess.
- Any outstanding debt is written off 30 years after the April following graduation, rather than 25 years.
The Institute for Fiscal Studies (IFS) had undertaken some new number-crunching on student finance to see what the long term effect of higher and more costly borrowing is likely to be. Its conclusions – which inevitably involve many assumptions – show that in many instances the line between a repayable loan and a non-repayable grant has become blurred:
- On average, students in the new system will graduate with debts of more than £44,000, over £19,000 more than under the old system.
- Whereas under the old system nearly half of students would have repaid their debt by age 40, only about 5% will have done so under the new system.
- The new system will see nearly three quarters of all graduates being left with outstanding loans to be written off, probably in their early 50s. The IFS thinks the average write off will be around £30,000.
If you have children or grandchildren at, or likely to go to university, the IFS numbers raise an interesting conundrum. Helping to meet fees or other costs covered by borrowing may simply mean that you are saving the government money because of the 30 year write off. On the other hand, the prolonged burden of debt repayment will leave most graduates still making repayments throughout their forties and, if they are higher rate taxpayers by then, facing an effective marginal rate of tax, national insurance and loan repayment of 51% on debt carrying interest at RPI+3%.
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